Canadian start-ups are eagerly hanging “For Sale” signs on their businesses and hoping to be snapped up quickly through simple acquisitions, according to an annual survey of emerging companies.
“The entrepreneurship ecosystem is growing and more and more people want to do it, but it’s a lot of work and a lot of ups and downs,” said Eugene Bomba, head of Canadian emerging company services at PwC.
“It’s not easy to put yourself through building a company for the longer term, but the longer you’re able to do it, the hope is that eventually the higher the valuation of your company will be and the more jobs that are created.”
The annual survey of 150 chief executives by PwC found that 78 per cent of emerging companies are looking at some sort of exit strategy, with nearly two-thirds eyeing an acquisition — up from last year’s 44 per cent.
And they’re not just looking for an exit strategy; they want a quick way out, as 40 per cent said they plan to leave the market in between one and three years.
Bomba says that stems in part from the belief that one to three years is the general life cycle of a start up, and that they should be selling by then.
But some Canadian entrepreneurs may also be taking an early exit – along with the income and learning that it provides – to build another company.
“The next promising time for us might be seeing these second and third time entrepreneurs who come back into the ecosystem again now that their lock ups (agreements) are over and that can be a really positive time and something that can be exciting for the Canadian ecosystem,” Bomba said, noting that the alternative is that Canadian start ups simply become talent pools for bigger U.S. companies.
“The serial entrepreneurs aren’t getting into it for a quick buck,” he added.
“They may exit because that’s what makes sense at the time, but that wasn’t the initial intention.”
Jeremy O’Krafka, a professor with the Entrepreneurship and Small Business program at Seneca College, and the founder of MENTORnetwork.CA, says that while the quick exit strategy is prevalent with tech startups, that doesn’t mean startups in general are waiting to be snapped up.
“It’s not as sexy to build something very slowly over a long period of time, but that’s still a very prevalent sector of the ecosystem as well,” he said, noting there’s also a subsection of entrepreneurs who have a long-term vision of what they want to create and that comes with a long-term commitment to building a business over time.
The PwC report found that, given their short-term view, few companies are interested in going public through an initial public offering, or IPO, because they’re concerned about the risk of a challenging IPO market or may not want to go to the trouble if they plan on selling.
Costs associated with going public are often too high for a small business to assume, particularly given the recent IPOs, such as Facebook, which have stumbled out of the gate.
While most startups said they’d like to be acquired, the report also found that many show a “startling” lack of acquisition preparedness.
The companies tend to be up to date on taxes and corporate documents, but less than a quarter have reviewed or audited their financial statements and only 11 per cent have completed a formal valuation.
In fact, 22 per cent have taken no steps towards preparing for a sale.
“While exiting through acquisition doesn’t bring about the same level of scrutiny as an IPO, M&As (mergers and acquisitions) do carry their own set of challenges and require a significant amount of due diligence,” Bomba said.
“A major component of a successful acquisition is preparedness, so that when the time is right companies are in the position to negotiate a strong sale.”
The annual Emerging Companies Survey looked at 150 Canadian startup CEOs and the challenges, opportunities, and strategic priorities surrounding their business. The vast majority of companies included were relative newcomers on the scene, with three-quarters of respondents reporting annual revenues of $500,000 or less. It was conducted online from January to March.
The polling industry’s professional body, the Marketing Research and Intelligence Association, says online surveys cannot be assigned a margin of error as they are not a random sample and therefore are not necessarily representative of the whole population.
The survey also found that the biggest challenge for most respondents in their most recent financial year was funding, followed by revenue generation. Canada remained their main source of revenue, with online sales as a key driver.
Attracting and retaining talent was only a concern for 10 per cent of companies – a big change from two years ago, when it was the top challenge for startups.